Recession Lingering Where Real Estate Stagnating

By Louis Jacobson

There's many a reason why a city or state may recover quickly from the Great Recession. But a single, huge factor explains the places that are likeliest to lag. Real estate.

"Because the burst of the housing bubble was a catalyst of the recent recession, areas with larger excess housing stocks to burn off will recover more slowly," said Julia Thornton Snider, an economic forecaster at the University of California (Los Angeles). Developers won't want to build while a housing surplus persists. Nor can a homeowner move elsewhere for a better job if the mortgage exceeds what the residence is worth.

Four states in particular are suffering from an especially awful real estate market, all of them in the formerly vibrant Sun Belt: Arizona, California, Florida, and Nevada.

In metropolitan Las Vegas, median home prices fell by a jaw-dropping 52 percent in just two years (2007 to '09). The city has the nation's highest foreclosure rate -- 6.6 percent of all units. Reno ranks 11th. For months, Nevada has jockeyed with Michigan for the unwanted title of worst unemployment rate -- now at 14.2 percent, and slightly higher in metropolitan Las Vegas. A steep decline in housing prices has created a promising market for first-time buyers, but the high unemployment makes it hard to attract newcomers.

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"For builders, 'Build it and they will come' worked for 20 years because the economic growth was there," said Rajeev Dhawan, the director of the Economic Forecasting Center at Georgia State University. "But that's not true anymore. If the regional unemployment rate is lower than the national rate, people will come." If it's higher, they won't.

In Arizona, Phoenix's decline in housing prices was almost as severe as Nevada's -- by 47 percent between 2007 and 2009. The city ranks seventh nationally in foreclosures, affecting 4.3 percent of its housing. "I don't expect the economy of Arizona or its neighbors to pick up until we start building houses again," said Marshall Vest, director of the Economic and Business Research Center at the University of Arizona.

Florida's real estate troubles are spread throughout the state: No fewer than nine of its metropolitan areas show up on RealtyTrac's top 20 list for foreclosures. (In descending order of severity, they are Fort Myers, Orlando, Miami, Naples, Daytona Beach, Port St. Lucie, Lakeland, Melbourne, and Tampa.)

Making matters worse, Florida's historical role as a destination for retirees means that a real estate rebound will depend heavily on the progress of the recovery in other states. "If I can't sell my home elsewhere, I can't move to Florida," noted Paul Bishop, the vice president for research at the National Association of Realtors.

The situation in California is, typically, bifurcated. The coastal areas -- Los Angeles, San Francisco, Silicon Valley -- have suffered their share of economic pain, but all possess diversified economies and educated workforces that have helped them survive. By contrast, the economic health of the state's interior depended more on the building boom, and so it has suffered disproportionately. Eight metropolitan areas in inland California rank among the top 20 in foreclosures -- Modesto, Merced, Riverside, Stockton, Vallejo, Bakersfield, Visalia, and Sacramento. The state capital was hit with a double whammy: The real estate market sank, even as Sacramento's No. 1 industry -- state government -- cut back.

Indeed, in each of these four hard-hit states, the unemployment rate was higher in June 2010 than a year earlier. The opposite occurred in other big states where real estate took less of a hit, including Colorado, Minnesota, Missouri, New York, North Carolina, and Washington.

Housing probably matters the most in predicting which states are likely to lag, but it isn't the only factor. Consider, too, the presence -- or absence -- of economic dynamism. Experts say that dynamism stems from a mixture of factors -- population growth, small-business innovation, educational attainment, and the extent of high technology's role in the local economy.

Michigan is an example of dynamism's absence. Although there are signs that the Detroit-based automakers are haltingly recovering from their low point two years ago, their home city is not yet seeing much job growth. Detroit has the tenth-worst job-creation record in 2010 among the nation's 100 largest metropolitan areas. Now the city is caught in a self-reinforcing spiral. High unemployment -- 21 straight months in double digits, and the better part of a decade exceeding the national rate -- feeds on, and feeds, a declining population. While the U.S. population grew by 9 percent between 2000 and 2009, Detroit's shrank by 3.6 percent. Other Michigan cities, including Flint, Grand Rapids, Lansing, and Warren, also shed population during the past decade.

Because small businesses are generally credited with creating the bulk of new jobs, states that rely mainly on big businesses can find themselves in a bind. According to statistics that compare receipts from businesses with fewer than 500 employees to those with 500 or more, the Rust Belt states of Indiana, Michigan, and Ohio are at a disadvantage. A backwardness in education will also impede an economic recovery, especially across the South. Louisiana, Kentucky, Arkansas, West Virginia, and Mississippi ranked in the bottom five in science and technology education in 2008, according to figures compiled by the Milken Institute, an economic think tank.

This isn't to say that these woebegone states can't recover. Louisiana, Kentucky, and West Virginia also produce energy, which can give them a boost as long as prices stay high. Besides, many of these places boast a low cost of living attractive to businesses and employees.

But there's something else that can help a place or hold it back -- and it doesn't yield to economists' measuring sticks. For want of a better term, it might be called sex appeal. Some places have it, and others don't.

"St. Louis is not known for that many things," acknowledged Jack Strauss, an economic forecaster at St. Louis University. "We're not distinctive. We don't have a marquee image in anything -- not in computers, not in information technology, not in coastal trade. Those are growing industries."

It's not the end of the line for St. Louis or cities like it, but it's a handicap. "Employer surveys say it's difficult to find quality [job] applicants," Strauss said. In an economy in which human capital counts for a lot, a lack of sex appeal is no small hindrance.